Is this the end of banking as we know it?

By Gretchen Morgenson NY Times News Service

The concept of the financial supermarket — the all-things-to-all-people, intergalactic, behemoth banking institution — bit the dust last week.

The first death notice came on Tuesday, when Citigroup, Exhibit A for the failure of the soup-to-nuts business model, said it was dismantling. Just over a decade after the dealmaker Sanford I. Weill tried to meld insurance, investment banking, mortgage lending, credit cards and stock brokerage services, the dissolution began.

Citigroup, it turned out, was too big to manage, too unwieldy to succeed and too gigantic to sell to one buyer.

Bank of America, another serial acquirer of troubled institutions — Merrill Lynch and Countrywide Financial most recently — fessed up that its deals needed taxpayer backing. The US government invested an additional US$20 billion in Bank of America (after US$25 billion last fall) and agreed to guarantee more than US$100 billion of imperiled assets.

Clearly, the entire financial industry is in the midst of a makeover. And while no one wants to call it nationalization, perhaps we can agree on this much: The money business as we have come to know it over the last two decades — with its lush salaries, heavy risk-takers and ultrathin capital cushions — is a goner.

Got that? Toast. Toe-tagged.

And that’s a good thing, because maybe we can go back to a banking model that is designed to do more than simply enrich the folks at the top of the enterprise, while shareholders and taxpayers absorb all the hits.

Banking, because it oils the crucial wheels of commerce, has a special standing in our world. That will always be the case.

But in exchange for that role, our country’s leading bankers might have approached their jobs with a sense of prudence and duty. Instead, a handful of arrogant greedmeisters blew up their institutions and took our economy off the cliff along the way.

REBUILIDING

It’s too soon to say how much taxpayer money will be spent trying to rebuild banks hollowed out by bad lending practices. Paul Miller, an analyst at Friedman, Billings, Ramsey, thinks that the US financial system needs an additional US$1 trillion in common equity to restore confidence and to get lending — the lifeblood of a thriving and entrepreneurial free-market economy — moving again.

That US$1 trillion would come on top of funds disbursed through the Troubled Asset Relief Program, which has tapped US$700 billion, and US president-elect Barack Obama’s stimulus plan, clocking in at US$825 billion.

Larger capital requirements, beefed up to serve as a proper buffer when lenders misfire, will be one change facing banks when we emerge from this mess, Miller said. He thinks regulators will require banks to hold tangible common equity of 6 percent of assets. Now many institutions hold less than 4 percent.

Such a requirement will cut into earnings, of course. Toning down the risk-taking will also reduce the profitability — or the appearance of it — at these institutions.

“This industry made a lot of money by taking a business line with 20 percent return on assets and levering it up 30 times,” Miller said. “But no more. Banks are going back to being the boring companies they should be, growing roughly in line with gross domestic product.”

Clearly this means that the rip-roaring performance of financial services companies and their stocks isn’t likely to return anytime soon. Because these companies’ earnings fed both the economy and the stock market in recent years, a more muted performance has considerable implications for investors, consumers and the economy.